Evolution of Nemak: a 'world class' foundry.

After struggling through start-up difficulties 16 years ago, this aluminum automotive foundry has become Mexico's `best-keptt secret.'

The company name, Nemak, comes from a mixture of Indian and Spanish dialect that when combined, can be interpreted to mean "machine with a soul."

And after speaking with the Nemak management team, you come away with the impression that they believe that their foundry, located in the foothills of the Sierra Madres, is something more than a plant merely producing aluminum cylinder heads. Or at least they want to be more than simply an aluminum foundry.

Evolution

Nemak was born in 1979 when Ford Motor Co., began its search for a business partner to help them meet the rapidly growing demand for cast aluminum auto parts. Ford eventually inked a deal with Monterrey-based Alfa to build a plant in the same northeastern Mexican city (120 miles from the U.S.), to produce cylinder heads, "the soul of the engine."

Although Alfa had no experience with aluminum castings, its other manufacturing strengths--along with its willingness and ability to invest in the new venture--paved the way for the budding business relationship. Initially, Alfa maintained a 75% interest in the new operation with Ford making up the rest.

Established in 1974, Alfa is a manufacturing conglomerate and major exporter whose holdings include its Hylsamex steel group, Sigma Alimentos food subsidiary and Alpek, a chemical producer. Sales in '94 were $2.7 billion and, on the strength of growing exports, were expected to reach $3.4 billion in '95. Nemak is part of Versax, the company's diversified products sector run by Roberto Garza, grandson of Alfa's founder. This group serves as an incubator for the firm's new businesses.

The early years of the joint venture were less than satisfying, according to Armando Tamez, Nemak's vice president of commercial and planning. Despite the significant investment in the state-of-the-art permanent mold foundry and guidance by Ford,

Nemak couldn't meet the quality levels its automotive customers expected. Tamez admits that the frustration levels during that time were rising rapidly.

By '82, Nemak sought out the technical expertise of Fiat's Teksid division a leading global producer of aluminum cylinder heads, to help get the struggling casting producer on track. The inducement to come aboard that year provided Teksid with a 20% stake in Nemak and reduced Alfa's share in the venture to 60% and Ford's to 20%.

The strategy paid off handsomely for Nemak. After ironing out early technical problems, Nemak has grown to become the Westem Hemisphere's largest aluminum cylinder head foundry. And if plans hold true, Nemak will be the largest automotive cylinder head producer in the world by the end of the decade.

The Business of Nemak

Tamez defines Nemak's business simply: "We are a focused high-tech aluminum foundry dedicated to manufacturing aluminum cylinder heads, and in the near future, blocks." Based on long-trends in the automotive industry, it's a good business to be in these days.

With the onset of strict fuel economy standards for U.S. cars, the move toward lighter weight vehicles has spurred the growth of aluminum automotive castings. Cylinder heads are a primary target for the switch from iron to aluminum.

Each U.S.-made car contained about 105 lb of aluminum castings in '88. By '95, however, this had grown to 150 lb pervehicle, and projections call for an 180 lb average by 2004. Between 1988-95,shipments of aluminum castings for automotive applications grew from 554,000 tons to 911,000 tons, and are expected to exceed 1.25 million tons by early in the next decade. Of this, shipments of permanent mold and sand cast aluminum components doubled, growing from 197,000 tons to 392,000 tons.

Estimates by Stratecasts, Inc., a consulting firm that develops casting demand forecasts, show that as of '94, only 10% of automobile engine blocks had been converted to aluminum. This is expected to rise to 25% by '98 and 40% by 2004. Cylinder heads, on the other hand, have experienced a much sharper growth rate. By '94, 37% of all U.S.-made cars contained aluminum heads. That figure will approach 80% by '99 and 90% by the year 2004. Most of these will be produced via permanent mold--Nemak's specialty.

If Nemak maintains and improves on its already high quality standards, the next decade could be even more profitable than the last 10 years.

By '87, Nemak produced 800,000 cylinder heads for Ford, General Motors (GM), Chrysler and Renault. Since then, its growth has been dramatic, reaching 1.9 million heads by '93 and more than 2.8 million this year. Tamez estimates that Nemak's revenues will approach $150 million this year, as the company captured 25% of the North American cylinder head market. According to Tamez, better quality and cost competitiveness have propelled Nemak's revenues by 135% in the last three years alone.

With 1200 hourly and salaried workers, Nemak produces 13 cylinder heads (in a premium 319 alloy) for eight engine plants in Mexico, the U.S. and Canada five for Chrysler, three for Ford, two for GM and three for Renault. Tamez also credits Nemak's ability to quickly move new designs into production as a significant factor in fueling the foundry's growth, noting that the firm launched seven new product lines in '94 while operating at full capacity.

Expansion plans already under way will give Nemak the capacity to produce more than 7 million cylinder heads by the turn of the century, making them the world's largest producer of automotive heads. They have already added low-pressure permanent mold (LPPM) casting to their gravity pour operations.

But Nemak doesn't plan to stop there. Its purchase of Comalco's low-pressure precision sand (LPPS) pilot foundry in Kentucky last summer is setting the stage for the foundry to begin producing aluminum engine blocks by the end of the decade.

Elements of Success

Nemak's success is based on its achievements in cost reduction, quality, use of new technology and its ability to transfer it to the shop floor. In existence for only 16 years, Nemak has taken great pains to reach where they are today.

Following its birth, Nemak necessarily relied on technical assistance from others in the partnership. But rather than remain dependent on others for its technical backbone tomorrow, Nemak quickly strove to create its own expertise. In the early '80s, Nemak implemented a successful technology transfer program intended to assimilate itself to aluminum foundry technology over four years.

Today, the foundry feels that, technically, it is beyond its partners. "We are totally independent and have developed our own state-of-the-art casting technology that differentiates Nemak and its products," Tamez said. "We are pursuing the R&D that helped us improve our technology.

"This enabled us to achieve a leadership in costs and quality, with aggressive plans to improve them even further. Cost and quality are given attributes in today's competitive aluminum casting market. We are convinced that service, simultaneous engineering and technology will become more important as the Big Three respond to Asian manufacturers."

Cost Reduction

Nemak is reportedly the lowest cost producer of aluminum designs, cylinder heads, in part because of 7 million of its high utilization of capital head producer. equipment and its labor rates. "Mexican industries are forced to a higher utilization of equipment because capital is harder to come by," said Manuel Rivera, president.

While labor is currently $6/hr less than in the U.S., Nemak recognizes that it's only a 4-5 year window of opportunity. That gap will soon be closed as NAFTA makes a bigger effect here, Rivera said, noting that Nemak's newer facilities are all designed to take advantage of greater automation.

The foundry's large volumes allow it to absorb human resource and material costs. Nemak of officials also reduced costs by benchmarking foundries they visited in the U.S., Europe and Japan. "We've also worked with our engine plant customers," Tamez said, "comparing our quality level with our competitors' under the same machining and assembling operations."

In addition, Nemak's simultaneous engineering participation reduced part weights, optimized processes, made machining improvements and used alternative materials. The foundry is also working on a new sand core system, warm-up scrap reduction and improved heat treat process to further cut costs.

Training

The technical expertise developed at Nemak isn't quarantined fined in its R&D labs. It is being carefully passed along to the floor as Nemak grooms everyone in the foundry to prepare for the skills needed in the ever-increasing technological age.

In '94, Nemak restructured its mandatory training program under a $1.5 million annual budget. Located on-site is the training facility, where in-house Nemak trainers provide instruction in 873 different courses. Every employee is trained in basic subjects (math, electricity and metallurgy), statistical tools and quality.

In addition, a specific training program exists for each of the plant's five job categories. Each training program focuses on standard procedures ("so people are capable of controlling the process"), and operation and maintenance ("so individuals can run their equipment adequately and perform some maintenance tasks on it."). Complex courses are provided for the operation and maintenance of specific equipment like casting turntables, machining lines or furnaces.

Each Nemak employee receives a minimum of 7 hr per month of training (maintenance has 14) and an average of 380 hr of training during his career.

Quality

According to Juan Mojica, total quality vice president, the 1960 definition of quality was "properties and characteristics of a product or service that satisfy the requirements or needs of the customer." By '87, the definition was amended to include "...with opportunity and reasonable cost. "

Nemak prefers J. Stephen Sarazen's statement of "Customer enthusiasm can be defined as exceeding customer's requirements or expectations to the extent that they are so excited about our products and services that they become an extension of the sales force."

With automakers considering a level of 0.4-0.8% scrap rate to be "world class" for suppliers (which will be lower in the future), Nemak--after some diligent work--matured to achieve that gold ring. In the '80s, when Mojica said Nemak was dictated by "trial and error and application of presumed recipes," it experienced external scrap rates of 2.2%. Through its technical partnership and a total quality system that emphasized standard procedures and intensive statistical training, Nemak improved to a 1.2% scrap rate in '91.

Since then, as Mojica noted, Nemak provided additional training, extended its stringent quality system to suppliers, followed a design of experiments program ("rather than trial and error"); employed solidification modeling ("reducing numbers of trials on specific products from 153 to 5") and conducted metallurgical studies that measure the impact of variables on mechanical properties and machinability studies.

The results--Nemak further reduced its scrap rate to "world class" level (0.01%-0.15%). Most significantly, it did so during its full-capacity, seven-product launches. And despite this pressure, it still held its quality of defective parts per thousand to under 3.0.

"Quality is like reaming to play the piano," Mojica said. "It takes years for success, not seconds."

Tamez said the firm's proudest moment arrived when Nemak became the first aluminum cylinder head foundry in the world to be awarded the Q-1 quality award by Ford--its first costumer 1986. Since then, the foundry has been honored with five Pentastar Awards and the Quality Excellence Award by Chrysler, the QSP award by General Motors, and Supplier "A" status by Renault.

Technology

"In the early days, as volumes increased and efficiencies were achieved, industry entered into an emphasis on cost competitiveness," said Rivera. "In the late--'80s, the engine plants emphasized quality.

"Today, quality is a given. Use of new technology is what makes the difference in a product."

Five years ago, the firm embraced a great deal of available technology, including solidification modeling, CAD/CAM, etc., as well as newer foundry processes.

"It's always easier to stick with what you know," Tamez said, "but we're refining our experience with other technologies to offer more services to our customers." Among these are the low-pressure permanent mold (LPPM) technology using sand cores for cylinder heads and low-pressure precision sand (UPS) technology for aluminum blocks.

The firm recently began LPPM development for cylinder heads after teaming with a Japanese company for technical assistance. Compared to gravity permanent mold (GPM), LPPM offers a higher yield due to a smaller riser, and the ability to produce more complex, thin-walled products.

Trials are currently comparing LPPM's viability against GPM, and the foundry will launch a mass production LPPM program in '96. This process allows the foundry to cast a wider range of cylinder heads.

Last June's purchase of the Comalco LPPS pilot facility marked Nemak's entry into the aluminum block business. Through this Kentucky-based facility, the firm can provide timely engineering support during the critical up-front product development process for blocks.

With its continuous metal delivery system, the LPPS' entire cycle time is 60 sec, due to an easily disconnected mold configuration. In this process, Nemak in effect incorporates an engineered chill bearing bulkhead, and isn't required to preheat its cast-in-place iron liners.

The process' other benefits include design flexibility, directional solidification, thin-wall capability, computer controlled counter gravity mold filling and low-cost tooling. Mojica also said LPPS has fewer variables to control than other processes.

"The signs of reaching the age of technology is when you begin patenting," said Mojica. Thus far, Nemak has applied for four new patents as a result of its personnel's innovations in process systems.

Nemak is also far ahead of its time in embracing environmental technology. While officials admit Mexican industry wasn't subjected to regulations as severely as those in the U.S. during the '80s, that situation has changed, in part due to NAFTA. The foundry has invested heavily in air pollution control equipment and thermal sand reclamation, as well as running a near-immaculate working environment. "We strongly believe operators must work in a clean environment, or else it's difficult to ask for productivity and quality," said Rivera.

Tomorrow's Nemak

Construction for Nemak II, the facility that offers capacity to make Nemak the world's largest cylinder head producer, began in October. Additional capacity for engine block production will be added to the new plant. Another 100 acres is also available to allow additional expansion.

Blocks hold the greatest growth potential for the firm. Following the process' continuing development, Tamez said mass block production will eventually be brought to Monterrey, and prototype production will be moved to Detroit.

Talking about their automotive customers who knock on Nemak's doors with a plethora of aluminum parts, Tamez said, "Other parts are attractive in the short term, but you can lose your focus very quickly. It's difficult to say no but we do." Rivera added: "we'll look at other aluminum products, but we won't get into them unless we can see a clear competitive advantage. We don't want to spread our technical resources, which would limit growth."

One automotive customer recently experienced a problem with another foundry's casting and called Nemak to inquire if they'd consider producing the part. But rather than producing the part for them, Sal Valtierra, R&D manager, worked with the supplier to troubleshoot the problem. "We'll help a customer even if it isn't a cylinder head--or cast by another supplier," said Tamez.

"We will continue improving existing processes," said Rivera. "There are still many opportunities for improvement. Metalcasting is a conservative business, and foundries must be more aggressive in cost reduction and manufacturing technologies."

Nemak intends to set the pace for aluminum automotive foundries, as well as blaze new ground for its customers. "We want to offer options for cylinder heads in both LPPM and GPM, and expect to fine-tune LPPS by this month," Rivera said. "As soon as we have an order for blocks, that's a major opportunity. We will double our revenue in cylinder heads in 4-5 years, and must offer more volume to customers through better efficiencies, better cycle times and smooth launchings."